Sunday, 8 July 2012

When and Why Individuals prefer Financial to Non-Financial Reward

It is an axiomatic fact
that, for a whole range of reasons, individual wants and expectations are
subject to changes over time. These changes also influence individual attitude towards
the overall composition of the reward package they receive also for what concerns
the balance between financial and non-financial rewards. For different reasons
essentially linked to their current wants and circumstances, with the passing
of the time individuals’ preference for reward packages mainly based on
financial rewards switches to packages mainly composed of non-financial rewards
and vice versa. Since this change in preference can occur rather frequently, it
could prove to be interesting the exercise of trying and identifying which particular
factors and circumstances contribute to urge people focusing upon the one
component, rather than on the other. Pinpointing the reason why the balance
between the two components of reward changes over time can provide employers
remarkably interesting insights, which can in turn help these to develop and
introduce more sound and suitable reward management practices.

Individuals
at large tend to get used to receive larger amounts of money rather quickly; it
is hence unlikely that an individual could ever consider him/herself not needing
or appreciating extra amounts of cash. In general, individuals tend to spend
their money and make plans about how to spend it in the future according to the
level of pay they actually receive. Every individual, nonetheless, dreams to purchase
something which could never be able to buy taking heed of the current
disposable income, or to buy something, which needs to buy, more easily and without
needing to make huge financial efforts (for instance, buying it on credit).

During their everyday working life, nonetheless,
individuals do not habitually focus on their personal expenses plans, but
rather on the activities, duties and tasks these have to perform. Employees actually
aim at performing compelling, meaningful works and are willing to shoulder the
related responsibility; for the vast majority of them this is indeed firmly
part of their psychological contract. Individuals want to understand how their activity
contributes to the attainment of the overall organizational strategy and
objectives. As long as employees perceive that the activities they perform and
the results they yield are contributing to the overall organizational success,
they will be willing to go the extra mile and feel encouraged to engage in discretionary
behaviour and make extra efforts.

The
picture described above essentially represents a situation according to which
people are likely to care about their personal commitments when they are at home,
whereas they are totally focused on and involved in their tasks, activities,
duties and assignments when they are in the workplace. When individuals encounter
personal difficulties, notwithstanding, meaning by that that these experience remarkable
hardships associated with their personal and family lives, such occurrences are
very likely to make an impact on the quality of the working activities employees
perform and hence on the output and results that these produce and yield in the
organizational settings.

It can be argued that individuals are likely to
focus on their working activities and perform well as long as they are not
seriously concerned about or distracted by personal-related issues. It is likely,
for instance, that an individual performs below his/her average level after
having learned that one of his nuclear or extended family members has been
diagnosed a severe disease. This actually is just an example of a personal
circumstance potentially able to affect individual performance in the
workplace. It might also be possible, nonetheless, that under such circumstances,
which have nothing to do with their workplace and their employer, individuals might
even find and perceive their working activity as a way to momentarily forget
their personal problems, help them to be resilient and regain personal strength.

When
family- or personal-related hardships and adversities are rather caused by the lack
of cash, putting people in a situation to barely be able to pay their bills or
even worse to pay their debts off, such situations are likely to have a wider,
more remarkable and longer-lasting impact on individual performance and on the quality
and quantity of their output. Differently from the previous case, in this instance
individuals can identify a clear line of sight between their personal
situations and the income provided to them by their employers, which at this
point they can perceive as unfair and inadequate.

This particular nuance about the importance individuals
attach to financial reward, in relation to their ability to honour their personal
and family financial commitments, can be clearly identified during periods of
economic downturn and slowdown. Pay freezes and below-inflation salaries
increases, eroding individual purchasing power and disposable income, are in
fact particularly suffered by individuals, causing them to pay more-than-usual
attention to the financial component of the reward package they receive.
Research at large supports this assumption; findings of a number of
investigations have revealed that individual attention to the financial component
of the reward package they receive becomes particular important during glooming
economic periods. Can, for instance, be mentioned to this extent the CIPD’s
“Employee attitude to pay” (CIPD, 2012), the NorthgateArinso’s “Global Pay
Optimism Index” (NGA, 2012) and the Aon Hewitt’s “Salary Survey” (Aon Hewitt,
2012). It is also of paramount importance stressing the circumstance that the findings
of the Global Pay Optimism Index investigation carried out by NGA (2012) revealed
that 1,300 respondents across the globe rated “a pay increase” as the most
valued benefit they would be glad to receive from their employers.

It
clearly emerges that, albeit individuals would ideally prefer to receive reward
packages offering the right balance between financial and non-financial reward,
where each individual has his/her different view of what “right” means, individual
focus tends to transfer to the financial component of reward in those periods
in which, for whatever reasons, their disposable income and purchasing power
have been reduced and weakened or are, more in general, no longer sufficient to
enable them to honour their financial commitments.

Despite
only economic downturn and slowdown periods have been mentioned thus far as
potentially dangerous factors capable to erode individual purchasing power, these
do not clearly represent the only reasons for individuals focusing at times more
on the financial component of the reward package they receive.

Whether
the predicted emergence of future economic contingencies can put organizations
on alert for a likely consequent widespread employee urge and appreciation of
salary increases, other less obvious and unpredictable personal factors can
contribute to alter the balance between financial and non-financial reward preferred
by a limited number of individuals or even by just a single person within an
organization. The above mentioned circumstance in which an employee’s family
member should develop a dangerous illness, for instance, requires the employee concerned
to incur unexpected expenses which could severely impact his/her disposable
income sufficiency.

There
are indeed a number of factors which may potentially impact individual needs
and thus the preference for the one to the other form of reward. Some can be
considered predictable, others less predictable; nevertheless, being aware of and
understanding all of the possible occurrences which may have an impact on
individual preferences can be considered a completely thorny feat to perform
for an employer. Employers need to be conscious that such circumstances can
occur and develop, and should hence pay attention to unusual individual
behaviour, which sometimes can be originated by the personal circumstances
affecting in turn their level of performance and the quality of their output.

The fact that every individual aims at receiving
a combination of financial and non-financial reward can be taken as axiomatic;
by contrast, what it is difficult to determine is when and why individuals tend
more specifically to prefer a larger component of financial reward to the
non-financial component.

Inasmuch
as employees want to carry out meaningful works and aim at actively
participating in the achievement of their organization objectives, individuals
can actually and genuinely adopt this attitude only when they have a financial
stability, that is, when their disposable income and purchasing power enable
them to rather comfortably honour their personal and family financial
commitments. There basically is a financial security threshold below which
individuals find it particularly difficult to genuinely and truly focus on
their working activities and fully benefit from the intrinsic aspect of the work
they carry out. Only once this threshold has been passed individuals can feel confident
and at ease with their personal situations and hence in a position to more
comfortably and genuinely focus on their working activities.

The
minimum wages and salaries set by national governments, where applicable, are
aiming to some extent at identifying this threshold, clearly in a completely
hypothetical way and do not taking into account the different personal
circumstances. From this point of view employers, consistently with their own
financial circumstances, should strive to identify the right threshold for their
organization, even though it could prove not to be sufficient too in that a financial
threshold should be in theory identified for each person.

Organizations
should also ensure that the reward packages they offer to their employees are
perceived as equitable and fair by all of them. Whereas on the one hand
individuals tend to consider as fair and adequate the reward packages whose
financial component enables them to live relatively comfortable lives,
employers should make sure on the other hand that the reward packages they
offer are considered and perceived as fair and consistent by the entire workforce.
Trying and identifying individual needs and expectations does not indeed mean to
cause unjustified inequalities and unfairness.

Designing
and developing reward management systems and express these by means of adequate
and consistent practices and policies is indeed everything but straightforward.
Nonetheless, employers should be aware of the importance of meeting as far as
possible individual wants and expectations. It is also important for employers
to be aware of all of the likely pitfalls associated with the design and
introduction of inconsistent and unfair reward practices and systems in order
to avert these. The task is genuinely challenging and that is why employers
must build and develop synergism with other forms of rewards, that is to say flexible
benefits and non-financial rewards, in order for them to attain the desired objective.